The tech stock sell-off in 2022 hurt investor returns as hedge funds sold stocks over fears of interest rate hikes. Many investors who bought tech stocks at inflated prices are now sitting on a 50-60% deficit. So, when tech stocks began to rally in May despite the Bank of Canada’s June rate hike, it raised doubt among investors. Is it worth buying more of these Canadian tech stocks for your portfolio? Would this reduce your average cost per share or compound your losses?
Should you pick up more of these tech shares?
While many stocks pop up when you hear losses from the tech stock sell-off, I looked into two stocks to see if they would justify adding more shares at their current prices.
Shopify (TSX:SHOP) is a pure-play e-commerce company that helps sellers (merchants) build their online store by subscribing to its services. It also provides merchants with support services like online payment and buy now–pay later options, logistics, and advertising and charges a minimal percentage on every transaction. Its key source of revenue is merchant solutions, which are influenced by gross merchandise volume, popularly called GMV.
Shopify stock has surged over 30% since May as there was a sudden optimism in the tech sector thanks to Chat GPT (Shopify is using Chat GPT as an AI shopping assistant). The stock price surge is difficult to justify fundamentally because the macro environment remains challenging. While inflation has eased, prices are still high. America is not yet out of the red zone; the possibility of falling into a recession later this year still exists. Even Shopify’s second-quarter outlook is subdued, unlikely to create any excitement.
The company is back to making losses, and its revenue growth has slowed to 20–25%. That makes its price-to-sales ratio of 13.9 times look rather expensive. If America falls into a recession, Shopify stock could fall because of its significant exposure to its neighbour. While Shopify has long-term growth potential, it is not worth adding more shares at the current trading price of over $83.
Shopify stock could see a correction coming due to overall macro weakness. With time, high-interest rates will seep into the economy and pull down consumer demand.
Enghouse Systems stock
Another stock which I believe is a hold but not a buy is Enghouse Systems (TSX:ENGH). It acquires vertical enterprise software solutions focussing on contact centers, video communications, healthcare, telecommunications networks, public safety and the transit market. The company funds its acquisitions through operating cash flow without taking internal debt. It looks to integrate these companies and grow through synergies and organic growth.
However, the earnings don’t look quite promising as the sales from its Vidiyo solutions fall and demand shifts from on-premise solutions towards cloud solutions.
One strong point about Enghouse is it has no debt and over $232 million in cash reserves. A strong liquidity position helps the company stay strong even in a recession. The stock is currently oversold as it did not rally with other tech stocks, which surged on the AI boom.
If you already own Enghouse shares, I wouldn’t suggest adding more to your portfolio despite the strong balance sheet and low stock price. Tech stocks are expected to have growth potential. Corporate tech spending could cool off later this year as companies keep tech spending to its minimal over fears of recession. Also, Enghouse’s solutions are not a game changer.
Descartes Solutions is a better option if you are looking for tech stocks with stable growth. Its supply chain management solutions are always in demand. If you are looking for high-growth stocks, look for those focused on game-changing technology.